The US Navy Wants a Better Way to Keep China’s Nose Out of Its Contracts

By Caroline Houck

April 19, 2018

The other day, the U.S. Navy was about to issue a contract — nothing remarkable for an organization that awards dozens each week. Then the contracting office realized that the specific division of the company they wanted to work with was in a joint venture with Chinese smartphone maker Huawei. All of a sudden, the service “turned around and said, ‘Whoa, stop the horses,’” Navy Secretary Richard Spencer told lawmakers Thursday.

In 2014, concerns about espionage led the U.S. to ban Huawei, which was founded by a former People’s Liberation Army engineer, from bidding on government contracts. In February, U.S. intelligence chiefs cautioned even the average American against buying Huawei products.

In this case, the Navy didn’t automatically kill the contract — though they did put a hold on it as they talked with the prime contractor.

“The prime said, ‘No problem, we're not going to use any of the assets of Huawei nor its software.’ It was a very enjoyable call. And then all of a sudden we said, ‘Great, can we see the governance documents of the joint venture?’ And things got very frosty,” Spencer said in a Senate Armed Services Committee hearing.

The Navy has now added prophylactic language into the contract. That language “outlined what our limits were for Huawei, which were not too much wiggle room at all,” the secretary told reporters after the hearing, and now the service is waiting to see how the company reacts.

But the fact that a foreign firm tied to one of America’s largest potential adversaries was able to creep into the U.S. defense industrial base should be alarming, even if the Navy caught this instance. That’s what Pentagon leaders mean when they say China’s “coming at” the U.S.“across the full spectrum,” Spencer said.

The U.S. government already vets foreign investment in American firms to evaluate their impact on national security, a process run by the inter-agency Committee on Foreign Investment in the United States, or CFIUS. Key lawmakers, including Senate Majority Whip John Cornyn, R-Texas, are proposing to update the process to better handle perceived threats like those from Chinese technology firms.

But Spencer said there needs to be a better way for the military services to be more exacting and reliably catch things like this potential Navy contract.

“What we need to do is find an institutional algorithm so we’re scrubbing this aspect of contracting without layering on another administrative burden,” he said. “And I think we can do it.”

It’s not just a concern in Pentagon contracting. The administration has also raised concerns about Chinese investment in U.S. critical infrastructure. The Federal Communications Commission voted unanimously on Tuesday to bar U.S. telecom companies who get federal subsidies from using suppliers — like China’s Huawei and ZTE — thought to endanger national security. Sen. Tom Cotton, an Arkansas Republican on SASC, said the FCC’s decision was a “strong statement of bipartisan agreement on a vital issue of national security.”

By Caroline Houck // Caroline Houck is a staff correspondent at Defense One. She previously was an Atlantic Media fellow.